CHANGING CONSUMER PREFERENCES AND THE GROWTH OF BRANDS IN THE UNITED STATES AND CHINA

The diamond dream is very much alive. The physical attributes that
diamond jewellery consumers are drawn to -
the sparkle and beauty of diamonds - are accompanied by emotional associations of love and promise, prestige,
mystique, tradition and a sense of the eternal. Diamonds continue to be seen as an emotional symbol and a
store of value.

However, the diamond industry cannot afford to take this situation for granted, especially when the
consumer landscape is changing so rapidly.

The US remains the largest market for diamonds in the world. Total US retail sales of
diamond jewellery
reached pre-2009 downturn levels in 2013 while polished
diamond content in jewellery increased by 20 per cent
from 2008. Overall, the US accounted for approximately 40 per cent of global
polished
diamond consumption by value in 2013.

FINE JEWELLERY IS FACING STRONG COMPETITION FROM OTHER CATEGORIES

It is clear that, as the US economy recovers from the financial crisis, the new consumer landscape
holds both challenges and promise for diamond jewellery.

In 2013, fine jewellery was not among
the top five on the list of gifts that US women would most like to
receive, ranking behind holidays (foreign and domestic), electronics, home furnishings and spa days.
Among young people (aged 18-34), the desirability of fine jewellery
ranked below branded luxury
products such as designer handbags and clothing. However, diamonds were still the most popular choice
for fine jewellery for all age segments; in fact,
diamonds were almost three times more popular than
any other type of jewellery.

BRANDS HOLD THE KEY TO GROWTH

Brands are becoming more important to the US consumer. The acceleration in consumer preference for brands of
diamond jewellery is evident from the claimed acquisition
of branded engagement rings – from just seven per cent
in 2002 to three and five times that level in 2011 and 2013 respectively. The growth in importance of branded
jewellery will have a particular impact in attracting the brand-conscious younger US consumer.

The attraction of branded diamond jewellery to retailers is that it supports both the
diamond dream and higher
margins. The offer of brands with a specific positioning and story, which goes beyond the 4Cs, helps retailers
address consumer needs for emotional engagement with the product and protects the offer against commoditisation.

HIGHER-END JEWELLERY IS A FURTHER GROWTH OPPORTUNITY

There are exciting growth opportunities in the US for high-end
diamond jewellery. Average incomes for the
top one per cent of Americans have grown much faster than national average wages. In 2013, female consumers
with household income of over US$150,000 accounted for only eight per cent of the consumer base for diamond
jewellery, but in terms of actual acquisition this group accounted for 14 per cent of diamond jewellery pieces
and 33 per cent of sales by value. Clearly, precise targeting of this consumer segment through higher-end
products and brands would help capture its potential more effectively.

THE BRIDAL SEGMENT HAS EXCELLENT PROSPECTS

Despite a lower percentage of the US population opting for marriage, and a longer wait to first marriage among those who do, among those who choose to marry the average amount spent per occasion continues to increase, according to a report by Mintel, a consultancy. Current penetration of bridal diamond jewellery is in line with historic levels, highlighting the resilience of this segment to the economic pressures in the US in the last few years:

79 per cent of those who got engaged in 2013 acquired a new diamond-only DER73 per cent of those who married in 2013 acquired a new diamond-only DER

Of all DERs acquired in 2013, a total of 82 per cent were diamond-only rings, the majority set in white gold or yellow gold, followed by platinum and silver, with the latter taking share from gold in the last few years.

THERE IS STRONG POTENTIAL FOR FURTHER GROWTH

Fine jewellery is the object or experience most
desired by urban women in China. Asked to select from a list
of competitive items or experiences they most coveted, almost half (48 per cent) of Chinese women selected
fine jewellery, a much higher percentage
than the next most desirable gift item - designer handbags,
chosen by just under a third of Chinese women. Among types of jewellery,
diamond jewellery was by far the
most popular choice, with about two-thirds of female consumers selecting it as their first or second
preference.

CHINA: A STORY OF GROWTH AND EVEN GREATER GROWTH POTENTIAL

Sales of diamond jewellery to Chinese consumers
were the fastest growing in the world over the last decade,
with a compound annual growth rate of 21 per cent from 2003 to 2013. As a result, the share of
polished diamonds
sold in jewellery to Chinese consumers grew from barely three per cent in 2003 to just over 13 per cent of global
demand in 2013. Including Hong Kong and Macau, the share of this region’s consumers in the global demand of
polished diamonds in jewellery was almost 16 per cent in 2013 in USD.

THE IMPORTANCE OF THE BRIDAL SEGMENT IN CHINA

In 2013, diamond jewellery consumption by
Chinese women was led by married women who acquired almost two-thirds
of pieces and accounted for the same proportion of sales value. The second most important consumer segment was bridal
women, who acquired about a fifth of pieces and contributed just under a quarter of sales value. Single women
represented the smallest proportion of sales, acquiring 14 per cent of pieces representing 11 per cent of
total value.

GROWTH IS LIKELY ACROSS ALL THREE ROUTES TO DIAMOND OWNERSHIP

The bridal segment in China is important today not only for commercial reasons but also because of the important role it plays in the consumer’s introduction to the diamond category. There are three main routes into the diamond jewellery category for the Chinese consumer. By far the most common of these is falling in love and getting married.

Major milestones in life such as birthdays and wedding anniversaries form the second most important route into the category for Chinese consumers.

Finally, there is receiving or buying their first diamond jewellery piece (usually earrings or a bracelet) as a treat. In 2013, 18 per cent of Chinese consumers bought diamond jewellery for ‘no specific occasion’ and 24 per cent of diamond jewellery was self-purchased rather than received as a gift.

ENGAGING THE CONSUMER WILL BE KEY TO GROWTH

The diamond jewellery selection process in
China involves a high level of engagement from the woman who will
be acquiring the piece, even when receiving diamond jewellery
as a gift.

The vast majority of recent acquirers or consumers currently choosing a piece of
diamond jewellery consider
branded offers as their first or second choice. When it comes to actual acquisition, Chinese consumers prefer
to buy from trusted domestic retailers such as Chow Tai Fook and Chow Sang Sang, which surveyed consumers say
they can trust. Since 2008, however, claimed acquisition of diamond jewellery from international brands
Cartier and Tiffany by young middle-class consumers has grown eight to nine times.

BRITNEY’S JOURNEY

BRITNEY’S PROFILE

26 years oldEvent coordinator for a cruiseship companyLive in ChicagoHas a Forevermark diamondengagement ring

For as long as she could remember, Britney had known she wanted a diamond engagement ring.

As soon as her fiance proposed, she went online to search for rings.

The DER tradition is well established in the US, with acquisition rates remaining around 80% since the 1980s (compared with 10% in 1940).

Online is the most popular channel for research. In 2013, 34% consumers and 82% brides researched online before purchase.

"When I Googled engagement rings, Tiffany was the first website to pop up. I used their ring finder to get an idea of styles and cuts - and decided I wanted a cushion cut"

Shortly afterwards Britney and her fiance Kevin went to try on rings. They made a special trip to the mall where they could browse a number of high-end department stores and jewellers at one go

For most brides (81% in 2013), the decision process begins with selecting the shape of the main diamond in the DER.

While rounds are still popular, fancy shapes have become more attractive, and now represent over half of bridal piecesPrincess (25%)Cushion (8%)Emerald (5%)

In 2013, 36% consumers and 53% brides browsed jewellery stores before purchase, visiting an average of 3 stores each.

Few women have decided what they want before going in-store - in 201348% purchase decisions made on the spotOnly 14% completely selected before purchase

At one of the stores, Britney was shown a Forevermark diamond. She loved the beauty of the diamond and the sales assistand showed her and her husband the inscription. They told her about registering the ring online, and how it was responsibly sourced.

"I really loved the Forevermark diamond, but it was a bit more expensive than some of the other rings, and slightly more than our agreed budget. The sales assistand was lovely but I told her I had to go home and think about it"

When selecting between a generic and branded diamond, "beauty" and "rarity" are the key attributes that influence selection - in 2013 both had over 80% relevance

Responsible sourcing becomes a differentiator when choosing between brands - in 2013 more than half consumers thought it provided distinctiveness to the brand

In the high-end bridal market (DER over $8,000), three quarters of couples have a defined budget for the DER.

Despite this, almost half of couples with budgets end up spending slightly more than they had planned.

A few weeks later, Kevin returned o the store where they had seen the Forevermark diamond, and bought it

"I couldn’t believe it when Kevin pulledd out the box and I saw it was from Forevermark! I guess I secretly hoped he would get it, but it was quite a bit more money so I wasn't sure if he would. It was such a nice surprise!"

In 2013, the most popular place to purchase DER wasIndependent jeweller (27%)National jeweller (24%)Regional jeweller (11%)

77% DER pieces in 2013 were paid for by the man alone; men tend to spend more on DER when shopping alone than with their partner.

For DER, there are two key moments when branding is important: the first is the receipt of the DER in a branded box.

The majority of women have some say in selecting their engagement ring - in 201335% chose the piece25% hinted / advised on choice37% other person chose

A few months later the couple returned to the same store to buy their wedding rings, which they had tried on earlier when they were browsing for engagement rings. Kevin’s was plain, but Britney wanted a few diamonds on the wedding ring as well

Britney also used this occasion to buy a pair of diamond earrings - a gift from her parents to wear on her wedding day

Brides now wait 7-9 months before engagement and marriage (5 times longer than 1980s), allowing them to save for longer and spend more on diamond jewellery.

Diamond wedding rings have exploded in popularity with incidence growing from 47% in 1980s to 68% in 2013

In 2013, many women bought another piece of diamond jewellery in addition to their DER for the wedding occasionEarrings: 28% DER acquirers also bought theseNecklace: 18%Bracelet: 10%

"I’m very proud of my ring and love it when people ask me about it - I can tell them all about the inscription and the fact it is responsibly sourced"

The second key moment when branding is important is when friends and family ask about the DER, and the acquirer is able to describe the attributes particular to the DER brand they have selected.

JI LAYMAY’S JOURNEY

JI LAYMAY’S PROFILE

Ms Ji planned to buy a diamond ring because her wedding was approaching. She thinks that a diamond ring is a necessity for her marriage

Her friends recommended she go to the Tiffany and Cartier stores to have a look. However, the prices were too high for her

Ms Ji decided to learn more about diamonds on the internet before continuing her search. That is the first time she noticed the brand Forevermark, although she did not click the link. Online, she learnt about the 4Cs and browsed various designs and cuts

In China, brands enter into the purchase decision very early. 99% women have awareness of major local and some international brands, and on average each customer is aware of 5.5 brands.

About a quarter of Chinese women use the internet for reasearch of diamond jeweller 11% look to learn more about quality and prices 6% educate themselves on brands 5% are pre-selecting designs Among single women and affluent consumers internet use is even higher at 40% and 56%

Ms Ji’s elder sister recommended her to go to the Donghua store. She tought that the store was reputable and had a good selection. So she went to Donghua on North Sichuan Road. There, she noticed the Forevermark counter and went to see the products. The salesman told her that every Forevermark diamond is unique and has an invisible inscription on with a unique

This information about Forevermark attracted Ms Ji a lot, so she came back home and searched for more information about the brand on the Forevermark website. Here she notied its rarit (only 1% diamonds make the Forevermark grade) and its responsible sourcing promise. This gave Ms Ji a good impression that Forevermark is a high quality product

Store visits are the most popular research channel for Chinese women - in 2012 57% visited specialist jewellery stores to view selection 37% visited department stores.

Chinese consumers look to known brands such as Forevermark as a sign of trust. Trust is the top driver of diamond jewellery brand consideration in China.

Ms Ji went to some jewellery stores on Nanjing Road, such as Laofengxiang, Xieruilin and Laomiaohuangjin, but none attracted her. Finally, she went to the Donghua store which is located in Nanjing Road. She went back to the Forevermark counter and chose a 75 point ring to try. The salesman gave here another two (60 points and 70 points) to compare

Ms Ji didn’t make her decision at once. She came back home had a long think about three diamonds. In the end, she thought the 75 points one offered the most value for money. The next day, she went to the store and bought it

Chinese consumers shop around a lot more - visiting an average of 3 stores before purchase

Within the branded offer, best value for money still plays an important part for the Chinese consumer

Note: Area of rectangles reflects approximate proportion of total market by value